Abstract
This paper examines the systematic risk and validity of the basic capital asset pricing model of Sharpe (1964), Lintner (1965) and Mossin (1966) in three Central and Eastern European stock markets (i.e. Slovenia, Hungary and Czech Republic). The CAPM is tested on a multiscale basis, building on the Fama and MacBeth (1973) methodology and applying two modern econometric techniques – wavelet analysis and generalized method of moments estimation. Empirical results indicate that the systematic risk and validity of CAPM implications are multiscale phenomena. Empirical evidence in support of CAPM implications in the investigated Central and Eastern European stock markets is found to be weak. The most commonly violated CAPM hypotheses are the zero Jensen's alpha condition, positive market premium, and the non-systematic influence of non-observable variables on the excess returns of stocks in these stock markets.
Highlights
The basic capital asset pricing model (CAPM), developed independently by Sharpe (1964), Lintner (1965) and Mossin (1966), building on the earlier work of Markowitz (1952) on mean-variance portfolio theory, has been the corner-stone of modern finance for the last four decades
In order to test the CAPM implications in a proposed two-step procedure, we in the first-stage estimated systematic risk of stocks in the stock markets on a scaleby-scale basis
Dajčman et al Multiscale test of CAPM for three Central and Eastern European stock markets the effective observation period for the calculation of the betas stretched from April 5, 2000 – April 2, 2010, and was the same for all observed stocks
Summary
The basic capital asset pricing model (CAPM), developed independently by Sharpe (1964), Lintner (1965) and Mossin (1966), building on the earlier work of Markowitz (1952) on mean-variance portfolio theory, has been the corner-stone of modern finance for the last four decades. The CAPM has been extensively empirically studied, the debate about its validity is continuing due to its simplicity, and other alternative asset pricing models not being without theoretical and/or empirical weaknesses, it has been widely applied in financial practice to evaluate not just securities, but any investment. The factor of proportionality is known as systematic risk or beta (β) of an asset. Knowing the beta of an asset and the market premium, one can calculate the expected rate of return for any asset
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